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Brazil Seeks to Boost Credit by $66 Billion

Reduction in capital requirements for banks is designed to generate US$66 billion in new loans in advance of presidential election; some think the move won't help.

Brazil took steps to boost lending by as much as 150 billion reais (US$66 billion) as it strives to quicken growth without stoking inflation before presidential elections in October.

Policy makers reduced capital requirements for banks by 15 billion reais, a move that could generate as much as 140 billion reais in loans, according to central bank official Caio Ferreira. They also created incentives for banks to channel as much as 10 billion reais from reserves requirements into lending.

Today’s moves are similar to measures taken July 25 that drew criticism from analysts who were surprised by efforts to boost credit a week after policy makers kept interest rates unchanged at the highest level in more than two years. Central bank President Alexandre Tombini said earlier this month that controlling inflation with higher borrowing costs isn’t at odds with measures to free up credit.

“Banks don’t want to lend. Putting more money into the inter-banking system is not going to do anything,” Tony Volpon, head of emerging markets research for the Americas at Nomura Securities International, said by telephone. “There is too much policy and political uncertainty.”

Swap rates on the contract due in January 2017 rose one basis point, or 0.01 percentage point, to 11.37 percent at 11:59 a.m. local time. The real weakened 0.4 percent to 2.2562 per U.S. dollar.

Economic Outlook

President Dilma Rousseff’s administration is struggling to contain above-target inflation without causing growth to deteriorate further. The central bank has kept the benchmark interest rate at the highest level since 2012, after lifting it by 375 basis points in the year through April.

The moves haven’t improved the economic outlook, according to analysts surveyed by the central bank, who forecast growth will slow and inflation will accelerate this year compared with last year.

Inflation will end this year and next at 6.25 percent, exceeding the official target of 4.5 percent, according to analysts surveyed on Aug. 15. The economy will expand 0.79 percent in 2014, which would mark a slowdown from 2.5 percent in 2013 and would be the worst performance since Brazil’s economy contracted in 2009, according to the analysts.

Today’s changes are part of a strategy to unwind measures that reduced credit in 2010 and 2011, Ferreira said. Bank lending grew 11.8 percent in June, the slowest pace since April 2004, data compiled by the central bank show.

“The government sees the economic slowdown as being more significant than what they expected,” Jankiel Santos, chief economist at Banco Espirito Santo de Investimento, said by phone. “As the evolution of credit concessions is not in line with what they see as compatible with reasonable economic activity, they are loosening monetary stance.”

Slow economic growth and faster inflation have become central themes for the opposition in one of Brazil’s most-contested presidential elections since its return to democracy in 1985.

Eduardo Giannetti, an economic adviser to potential candidate Marina Silva, said last night a victory by the opposition would reduce “clumsy intervention” in the economy, while opposition candidate Aecio Neves has pledged to slow consumer price increases and boost growth. Giannetti said he was speaking on his own behalf and not as Silva’s adviser.

A trained economist, Rousseff said in an interview on nightly news Aug. 18 that Brazil is still overcoming the impact of the global crisis and that the economy will improve in the second half of the year.

While Rousseff would garner the most support in the Oct. 5 election, she wouldn’t have the majority of total votes cast needed to avoid a runoff three weeks later, according to a poll conducted by Datafolha Aug. 14-15.

Silva in a second round would command a lead of four percentage points, which falls within the margin of error and makes the outcome too close to call, according to Datafolha, a Sao Paulo-based polling company.

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